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The lack of performance in Glanbia’s performance nutrition business in the last six months was clearly evident in the company's half-year numbers.
Revenues were up 13% driven by last October’s SlimFast acquisition but overall profits in the division fell 30%, with margins collapsing under 8% from above 12% in the same period last year. On top of this, volumes declined 8% and price fell almost 3%.
It certainly surprised many investors, causing the shares to collapse by 22% since Tuesday as they offloaded 4.5m shares on Wednesday.
But what has gone wrong in the jewel in the crown of Glanbia that has been the main driver of growth in the business for almost a decade now?
The company said the volume declines were “primarily related to the negative effect of geopolitical issues and related supply chain changes in certain non-US markets”. It also blamed consumers shifting to online from traditional retailer channels in Europe. And its key market of the US, where it mainly sells through speciality channels, saw a decline in sales. Even economic conditions in countries such as Brazil and Mexico were seen as factors in the collapse of fortunes.
It seems a combination of price promotions or reducing prices has not stemmed the volume declines while at the same time they have dented margins significantly.
The numbers were stark, and questions remain over the recovery plan in the next six months and even to the longer term outlook for the division. Glanbia expects margins to improve significantly in the second half as it implements price increases but doesn’t feel that it can make up for the lost ground in the first half. Therefore, it expects its performance nutrition business to deliver a lower profit in 2019 than it did in 2018. Based on the outlook it has provided, that would suggest a profit figure in the region of €160m for the division - down €13m or 7.5% on the 2018 result.
This will be a major concern for long-term investors in Glanbia given the company's stated targets to deliver profit margins of 13% to 15% on average between the years 2018 and 2022. Pressure will no doubt mount on senior executives to outline a plan on how it intends to meet these targets.
A €1bn acquisition bet
Glanbia’s first move into the performance nutrition space was with the acquisition of Optimum Nutrition for €213m in 2008. Since then it has spent a further €1bn buying companies up in the performance and lifestyle nutrition space. Its most recent acquisition was last year when it paid €303m for SlimFast. In fact over the last decade it has announced seven major acquisitions in this space and spent a total of €1.2bn in order to drive growth.
By the time the division was broken out in 2013, when it was only the Optimum Nutrition and BSN business, it had revenues of €655m. These brands brought revenues with them of €225m and under Glanbia’s wing they grew almost threefold to become a €655m business by 2013.
Over the following five years revenues in the division grew €525m, with €262m (excluding SlimFast as it did not add to earnings in 2018) bought in when acquiring these companies. In simple terms, this means that Glanbia has bought 50% of its revenue growth in these years.
As competition to buy these types of companies has heated up (driven by the attractive margins), the price paid for them has also increased. When Optimum and BSN were purchased, Glanbia paid eight to nine times earnings for them. The latter ones of Thinkthin and Isopure, where Glanbia paid a similar amount, were twice as expensive costing 17 times earnings. And then when it bought SlimFast last year it paid just short of 15 times earnings for it.
Tracking the performance of performance nutrition
The performance nutrition division, was broken out as a separate reporting division in 2013. Up to that point it was combined in Glanbia’s US cheese and nutritionals division.
Since 2013, reported profits for the division have more than doubled and are up 2.5 times or €102m to €173m between the years of 2013 and 2018. While margins have increased from 11% and hit a peak in 2016 at just over 16%, last year they had fallen to under 15%. And the group is now guiding margins in the region of 12% for 2019.
Over the last five years (2013-2018), revenues have increased by €0.5bn to €1.2bn and they have increased 70% when the effect of changes in currency is stripped out.
Growth slowing
In the early years, revenue growth was very strong. In 2014, when it was first broken out, revenues grew 16% compared to the prior year with almost all of it coming through volume growth. Over the following five years, revenue growth has ranged from 7% to 14%. However, once acquisitions are stripped, out revenue growth has been very low to anaemic in some years, ranging from a peak of 8% to as low as 1%.
Despite the acquisitions strategy, volume growth has also been slowing. In 2014, volumes grew by 15.7%. Over the following years volumes grew by between 1% and 7% depending on the year. And last year volumes grew 9%.
Glanbia has stated it experiences some demand elasticity at times when it implements price increases. This was best illustrated last year when prices declined 4% and volumes went up 9%. The only year Glanbia increased prices across its range was in 2014. Since then prices have been falling year on year.
Over the six-year period, price increases drove growth in only one year (2014). All other years saw prices declining. There is no doubt looking over the six-year period that price drops have dragged the revenue growth and have declined a combined 12% over the last six years, reducing by 2% per year on average over the period.
Focus on brands
In the early days Glanbia sold both its own brands and contract-manufactured own-label products for other brands. It has been moving away from this model over the years with the aim of producing more in its own brands rather than being a contract manufacturer. This can be seen in its branded revenue growth figures – when acquisitions are stripped out, much of the revenue growth is branded revenue growth.
Where are the products sold?
Over the years, Glanbia has shifted where it has sold its products in this segment. This has been partly because of changing consumer habits but mainly as a result of the changes to its portfolio of products following the acquisition of companies. For example back in 2015, speciality stores such as Holland and Barrett and GNC in the US (typical supplement stores for gym goers) accounted for over a third (36%) of the business, while online accounted for only about a fifth (22%).
Last year, online had become its most important sales channel and accounted for 28% of revenues while speciality stores accounted for a quarter (26%). Stores such as supermarkets and convenience food shops have also become increasingly important and grown from having only a 10% share of revenues to 21%. It is expected with the acquisition of SlimFast that this channel will become more important over time. The fastest growing channel has been online and is seen as a key driver of growth.
Which markets are most important?
A core part of Glanbia’s performance nutrition strategy has been to grow its business beyond North America. The US remains its most important market at around 60% of sales. Last year 39% of total revenues came from outside North America. Key areas where it experienced strong growth included Australia, India, Mexico, southeast Asia, Benelux and Germany.
Which products/brands are most important?
Its flagship brand remains Optimum Nutrition, and its protein powder format represents 63% of overall sales indicating it has sales of some €743m (six times more than when it was acquired 10 years ago). Sales of ready-to-eat products such as health and protein bars have more or less tripled to 14% last year compared to 2015. Ready-to-drink products accounted for 5% of sales but this is expected to grow significantly when the SlimFast acquisition is added in. Energy powders account for the remaining 14%.
Glanbia’s performance nutrition division is evolving from being just a global performance nutrition brand family to increasingly having an emerging presence in lifestyle nutrition brands. Its recent acquisitions underline this strategy.
However, given the complexities of a market that is characterised by changing consumer habits, a growing awareness of health and wellbeing, the mainstreaming of sports nutrition, the growth in online purchasing and plant-based nutrition, shareholders need to ask does Glanbia have the capabilities to succeed into the future?
Goose that lays golden eggs for farmers
Glanbia co-op, which is made of 16,000 farmers owns a 31.5% stake in Glanbia plc. The value of the PLC is therefore inherently important to the co-op. Based on the current valuation of the plc at around €3.5bn, the co-op is valued at around €1bn. Farmers themselves hold a significant number of shares directly in the plc, many of which were received over the years through various spin-outs.
But from a cash and income point of view the profitability of Glanbia plc is also important to farmers while it may not appear obvious at first.
Last year the co-op received a €22m dividend from the plc based on its shareholding. The co-op takes this along with the dividend it receives from its investment in the processing joint venture Glanbia Ireland (€18m in 2018) and uses it to fund milk and grain price supports, trading bonuses and volatility funds and many more member initiatives.
The plc owns the other 40% of the Glanbia Ireland joint venture and the plc received a dividend of €12m from Glanbia Ireland last year for a return on its investment.
If performance in the plc was to weaken in the longer term, the dividend payout would come under pressure. This would put the €22m at risk to the co-op. In milk terms €22m is almost 1c per litre. For Glanbia farmers the plc has been the golden goose that lays the golden eggs. If anything happens that goose, the overall Glanbia model will fail.
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